CCI to examine Prepayment charges
By Joseph Samson
Nov 3, 2009
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The Competition commission of India (CCI) is looking into the matter of banks charging prepayment charges. If CCI finds this practice against the customers' interest, the regulator might ban it and even penalize banks charging prepayment fee, a person privy to the development said.

The apex bank has expressed disapproval over pre mature payment charges. Most of the private sector banks charge between 2 percent and 5 percent of the principal sum and/or lump sum for the same. Even SBI has started penalising its customers for paying in advance.

Supporting the levy of prepayment charges, HDFC said that prepayments were essentially ‘accelerated' payments before time and disturb the asset-liability match. Therefore to reduce the negative impact of the prepayment charges bank charge penalties. "Everytime when there is a prepayment from the borrowers it will not be feasible for the banks to prepay its lenders as its loan agreement with lenders may either not permit it or permit it only with certain charges, notice period and may be subject to other conditions," the bank said. HDFC levies a charge of 2 % on premature payments.

Deutsche Postbank Home Finance refused to discuss the issue while LIC Housing Finance declined to give its views. Till now RBI has not given any directions regarding the prepayment levy.

Few lenders charge this fine only when a customer decides to refinance the loan by borrowing at a cheaper rate of interest from some other institution. An HDFC spokesperson said that the policies of HDFC have always favoured its customers like there are no prepayment charges on part prepayments up to 25% of the opening balance or if the customer prepays his total loan after three years from his own savings.

Senior bankers say that the consumers think that it is just to levy a prepayment charge on fixed rate loans but unfair to attach it with floating rate loans. They feel that the when the interest rates come down the banks do not pass the full benefit to customers but hike the equated monthly instalments as soon as the interest rates go up.

A person familiar with the CCI investigation said "Prepayment penalty comes in the way of a customer who wants to close a loan and avail of another loan from a bank that lends at a lower interest rate. It makes such migration economically unviable unless the interest rate differential between the banks is more than the quantum of penalty. Such exit load on loans is an entry-barrier for new products in the market and hence anti-competitive."


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